26 July 2018

DyStar Global Holdings (Singapore) Pte Ltd v Kiri Industries Ltd
[2018] SGHC(I) 06

The Singapore International Commercial Court in DyStar Global Holdings (Singapore) Pte Ltd v Kiri Industries Ltd has delivered its first-ever decision on a minority oppression claim. In a landmark judgment, the court allowed an oppression claim by the minority shareholder of a joint venture company and ordered a buyout of the minority shareholder’s shares.

This decision provides essential guidance on standards of corporate governance and transparency by which a company should be run. The case also emphasises that directors must not put the interest of the majority shareholder who nominated them onto the board above that of the company’s.

Facts

The dispute arose from a joint venture involving major players in the dye chemicals industry. Kiri Industries Limited (“Kiri”) and Senda International Capital Limited (“Senda”) were shareholders of the joint venture company, DyStar Global Holdings (Singapore) Pte Ltd (“DyStar”). Senda was the vehicle through which Zhejiang Longsheng Group Co, Ltd (“Longsheng”), a PRC company, made its investment. Both Longsheng and Kiri are publicly listed companies.

The terms of the joint venture agreement between Senda, Kiri and another Longsheng subsidiary, Well Prospering Limited (“WPL”), were encapsulated primarily in the Share Subscription and Shareholders Agreement (“SSSA”) and the Convertible Bond Subscription Agreement (“CBSA”), which were executed in January 2010. Under the CBSA, WPL would provide funding by subscribing to a €22 million bond issued by DyStar (“Convertible Bond”), which WPL would be entitled to convert to shares in DyStar.

The SSSA provided that overall control and management of the affairs of DyStar was to be vested in the board of directors of DyStar (“DyStar Board”). Pursuant to the SSSA, Senda appointed three directors (“Longsheng Directors”) to the DyStar Board while Kiri appointed two (“Kiri Directors”).

In July 2012, the DyStar Board passed a resolution approving the transfer of the Convertible Bond from WPL to Senda pursuant to the terms of the CBSA. Senda subsequently converted all of the debt under the Convertible Bond into equity. This made Senda the majority shareholder of DyStar with 62% of the shareholding. The emergence of Senda as the majority shareholder coincided with the time that DyStar turned profitable and marked a deterioration in the relationship between Kiri and Longsheng.

Aggrieved by a number of acts carried out which Kiri perceived to be against its own interests, Kiri commenced proceedings seeking relief against Senda for minority oppression.

Decision of the Singapore International Commercial Court

Section 216(1) of the Companies Act allows a member of a company to seek redress where there has been oppression, disregard of a member’s interests, unfair discrimination or other prejudicial conduct. The common thread underpinning this provision is the element of unfairness. This requires the court to undertake a two-stage enquiry: first, what (if any) the parties’ legitimate expectations were, and secondly, whether the conduct complained of is contrary to (or has departed from) those expectations to such an extent that it has become unfair.

The parties’ legitimate expectations

The SSSA conferred on the majority shareholder ultimate control over the DyStar Board. The court opined, however, that this did not mean that Longsheng (through WPL or Senda) could run DyStar as though it was a Longsheng subsidiary, without reference to the Kiri Directors or regard for Kiri’s interests as minority shareholder.

On the contrary, Kiri’s exclusive right to appoint and remove two directors under the SSSA had to have meaningful content. Given the structure of Longsheng’s investment in DyStar (which gave Longsheng control first as creditor and upon conversion as majority shareholder), from Kiri’s perspective, the entrenchment of the Kiri Directors on the DyStar Board served to ensure that Kiri and its directors had their say on key decisions. To achieve this expectation, the Kiri Directors would have to be provided with all information necessary to participate and make decisions effectively. At the same time, there was the expectation that the Longsheng Directors, in the discharge of their fiduciary duties as directors, would act in the best interests of DyStar. The SSSA thus created legitimate expectations that DyStar would be run in accordance with the standards of corporate governance and transparency applicable to any ordinary company and that the Longsheng Directors would act in the best interests of DyStar as a whole pursuant to their fiduciary obligations under the general law.

Senda’s conduct amounting to oppression of Kiri as minority shareholder

Moving on to the second stage of the enquiry, the court found that several actions taken by Senda (acting at the behest of Longsheng) amounted to oppression of Kiri as a minority shareholder. These included:

  • Causing DyStar entities to enter into transactions with Longsheng-related entities, such as related party loans and cash pooling arrangements, which benefited Longsheng at DyStar’s expense; 
  • Causing, without commercial justification, the payment of US$2 million to a Senda-nominated director in the form of a special incentive for work allegedly done in 2014; 
  • Allowing Longsheng to retain and exploit a patent (an asset of a subsidiary of DyStar) instead of having it re-assigned to DyStar, contrary to Longsheng’s contractual obligations; 
  • Causing DyStar to pay Longsheng fees amounting to US$10.5 million for services which were allegedly rendered, which fees were found to lack bona fides and commercial justification; 
  • Causing the DyStar Board not to declare dividends even though the company made considerable profits between 2013 and June 2017; and 
  • Seeking to unfairly exclude Kiri from the management of DyStar by instructing DyStar’s management to refuse any requests for information made by Kiri.

Buy-out as the appropriate relief

Following the court’s finding that there had been minority oppression, Senda was ordered to buy out Kiri’s shareholding in DyStar. The court was of the view that this order was appropriate given the absence of any residual goodwill or trust between the parties. Senda’s submission that the court could, instead, seek to regulate the affairs of DyStar in order to prevent future oppressive conduct was rejected. This was because of the extensive and multi-faceted nature of such orders, which, given the level of dissatisfaction between the parties, could lead to more problems in the future.

Allen & Gledhill Partners Dinesh Dhillon, Lim Dao Kai and Margaret Joan Ling represented the successful applicant in the case.

 

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